Stocks sink; Dow’s longest loss streak this year

Wall Street reacts to Fed doubts, Japanese currency moves

By

KateGibson

NEW YORK (MarketWatch) — U.S. stocks tumbled on Wednesday, with the Dow industrials falling for three consecutive days for the first time this year, as the Japanese yen furthered its rise and doubts about monetary policy had investors on edge.

“The markets are very much tying off of the Japanese currency and also again, Fed policy, which hasn’t changed, and we don’t think is likely to change this year. But the comments from the various Fed governors are acting as trial balloons,” said Paul Nolte, managing director at Dearborn Partners. “They are getting a sense of the market’s reaction without actually changing policy,” he added.

The Federal Open Market Committee will hold a two-day meeting next week.

After a 119-point opening leap, the Dow Jones Industrial Average
DJIA, -1.35%
fell as much as 140 points and ended at 14,995.23, a loss of 126.79 points, or 0.8%.

The S&P 500 index
SPX, -1.42%
lost 13.61 points, or 0.8%, to 1,612.52, with consumer discretionary pacing losses that extended to all 10 of its major industry groups.

For each stock rising, more than four fell on the New York Stock Exchange, where nearly 686 million shares traded.

Composite volume neared 3.2 billion.

Volatility’s return to Wall Street can be traced to May 22, when Federal Reserve Chairman Ben Bernanke said the central bank could cut back on its monetary stimulus if the labor market shows “sustainable improvement.”

“We literally spent the entire year without having three down days in a row, just grinding higher, and we never had more than a 3% decline up until May 22,” Art Hogan, market strategist at Lazard Capital Markets, said in a telephone interview late Tuesday.

“The FOMC and Ben Bernanke have introduced volatility into the market for the first time this year, so the introduction of volatility seems extreme to us, but that’s only because we spent the first five months without it,” Hogan said.

Dearborn Partners’ Nolte agreed, saying: “It seems more volatile only because of where we’ve been. It is a return to more normal volatility.”

“The concern over Armageddon is way overblown. I don’t see it as anything more than a correction; it doesn’t mean you rearrange your entire portfolio,” Nolte added.

The Fed’s monetary easing and better-than-anticipated corporate results have fed a bull market now in a fifth year, pushing the S&P 500 up 139% from a 12-year low in 2009.

On Wednesday, the U.S. dollar fell against the Japanese yen
USDJPY, +0.10%
which on Tuesday rose the most against the greenback in three years.

“Global credit markets are calmer after a tumultuous selloff the past month, sending yields materially higher, but still very low compared with historical averages and where most rates were last year,” wrote Nick Raich, CEO at the Earnings Scout.

“Despite, or maybe because of, the recent sharp rise in 30-year-mortgage rates to 4.15%, mortgage applications in the U.S. were up 16% last week after four weeks of terrible numbers,” Raich added.

On the New York Mercantile Exchange, the cost of crude rose, with oil futures
CLN3, +0.00%
up 50 cents at $95.88 a barrel, while gold futures
US:GCQ3
added $15 to finish at $1,392 an ounce.

U.S. stocks fell sharply on Tuesday after the Bank of Japan kept its monetary policy steady, increasing fears that global central banks won't maintain their monetary easing. Unease as to when and by how much the Fed would taper its $85 billion in monthly bond purchases means the market’s recent return to volatility will persist until the Fed’s tapering plan becomes clear. Read: Pimco sees volatility here to stay and a global recession down the road

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